Well, might as well have life insurance.
Come on, face it, you are going to die one day. What is one way to prepare for it? Live life to the fullest? Yes. Have fun with your loved ones? Yes. Buy life insurance? Yuck. Then again, it really does make sense.
As you consider the wide range of life insurance coverage available, you may wonder what type really fits your needs now, and what will suit your needs in the future. A good, first step is to ask yourself why you are buying insurance, and how it will fill your personal and family financial security requirements. Do you want insurance to cover a new home or mortgage? A college education? A business investment? Your retirement? Your final expenses? Once you have the answers, you can look at the basic types of coverage, whole life, universal life, and term.
Whole Life Insurance — Cash Value for Your Dollar
Whole life insurance helps provide not only security from financial hardship in the case of a death, but also a “living” savings and investment vehicle for the policyholder. As cash value insurance that links insurance protection with savings, premium dollars paid contribute to the combined program. Premium payments first pay the cost of pure insurance coverage, including expenses and mortality factors of the insurance company; the company then invests “leftover” dollars to build the policy’s guaranteed cash value.
In addition to the guaranteed cash value buildup in the policy, policyholders are provided with regular dividend payments, the result of lower expenses, lower mortality rates, and higher investment results than were predicted when premiums were set.
Another whole life insurance feature is predictability of expense: Premium payments at inception of the policy will not change and will continue until the policy endows (when the cash value of the policy equals the face amount of the policy). Or, an “accelerated” payment plan may be chosen, which permits payment of premiums later in life out of withdrawals from the dividend balance rather than out-of-pocket.
A guarantee of insurability comes with any whole life insurance policy. Once the individual to be insured provides initial evidence of insurability — and as long as premium payment responsibilities are met — the insured is guaranteed coverage for life in accordance with the terms of the policy. Evidence of insurability will never be necessary again, as long as the original policy remains in force.
The final feature to consider is the value of whole life insurance as a “creditor,” if necessary. Funds may be borrowed against the cash value of the policy at any time, but outstanding loan balances will be deducted from the death benefit in the event of the death of the insured.
There are numerous variations on whole life insurance as it was originally conceived. In keeping with the changing investment philosophy of policyholders, universal whole life was created. This policy provides all of the above benefits of whole life, and adds the possibility for the policyholder to change both the amount of premium payments and insurance coverage as individual needs change. The policyholder does accept the investment risk associated with the investment portfolio choices available, which can include growth, income, money market, equity income, and diversified mutual funds. Either conservative or aggressive return options are thereby available for policyholders.
Term Insurance — Pure Protection for Your Dollar
As the name implies, term insurance provides pure insurance protection for a specific period — or “term” — of time. It does not generally offer any guarantee of premium, death benefit stability, or right of renewal. It does provide some of the lowest cost protection available, and it is this cost factor that is its most beneficial feature for some.
There are one-year policies offering a right of renewal at a slightly higher premium paid each year to reflect the higher age of the insured. There are also decreasing term plans available to cover mortgages and loans. This means the face amount of the policy decreases as the mortgage or loan obligation decreases, thus moderating premium payments. Conversion to a whole life policy without a medical examination is generally permitted with most term policies.
Your Personal Life Insurance Needs
Contact your financial and/or insurance professional who can help you determine the short-term or long-term nature of your needs, as well as how the life insurance coverage available can help fulfill them. He or she can analyze your current cash position to assure the life insurance coverage you choose is appropriate and affordable for you.
A Quick Look at Life Insurance Needs
Have you ever wondered how much life insurance is “enough”? One general rule of thumb says that you should buy an amount equal to five to seven times your annual income. Sure, it may be a reasonable guideline, but this method does not relate life insurance needs to your personal financial goals.
A better method may be to implement a “needs analysis.” This process helps you determine the future short-term and long-term financial needs of you and your family. Once your needs have been identified, you can design a plan to help assure that money will be available to meet those objectives.
Needs analysis is not the highly technical financial planning associated with business ownership or planning for the conservation, distribution, and coordination of wealthy individuals’ assets. Rather, it is appropriate for everyone. By assigning a specific dollar value to each item or “need” you want to provide for, needs analysis zeroes in on what may still be required, in terms of additional capital, to get the job done.
Through specific questions designed to identify areas of concern, you will be able to establish your financial priorities. Here are some examples:
- What is most important to you?
- How would your objectives be affected in the event of the premature death or disability of you or your spouse?
- Is your current savings program adequate to accomplish your financial objectives?
Personal and Financial Perspectives
For most people, needs typically revolve around attaining and maintaining a comfortable lifestyle. This often translates into a good home, the advantages of a college education for your children, enough income left over for leisure activities, and last but not least, a retirement income sufficient to maintain your lifestyle when your working years are over.
While saving and investing will undoubtedly be part of your overall planning strategy, it takes time to accumulate a pool of capital. One advantage of life insurance is that it creates an instant estate, which helps assure that money will be available to aid in meeting specific goals in case an untimely event (such as an early death) deprives you of the time required for wealth accumulation.
A complete needs analysis helps determine what is important in creating and protecting the lifestyle you and your family enjoy. Even if current income doesn’t stretch far enough to satisfy all of your future financial objectives, the needs analysis process will help you establish and focus on your priorities.
Your insurance professional can guide you through this comprehensive analysis to identify your goals and to show you how life insurance can help to meet each of your objectives. By initiating a plan of action, you can create an estate that will provide financial assets should you no longer be able to do so yourself.
Customizing Life Insurance with Policy Riders
When many people consider life insurance, the first thought that usually comes to mind is, “How much is enough?” However, there are other aspects of life insurance policies that can provide important benefits.
For example, riders essentially allow policy owners to give themselves and their beneficiaries’ added protection if certain events happen. Among the surprisingly large number of riders that life insurance companies offer, one of the more frequently utilized is the “waiver of premium.”
The waiver of premium rider protects you in the event that you are disabled and can no longer afford to pay your life insurance premiums. This rider has been compared to having a miniature disability policy on your life insurance contract. Not only does the insurance company pay your premiums pursuant to the terms of the contract, but if you own a whole life policy, the policy cash values and dividends generally continue to grow. These increasing policy values are a ready source of income that can be used to help pay your expenses if you are disabled and can no longer work. You could access these values through loans or surrenders. (Note: Loans and withdrawals may result in adverse tax consequences and loans carry interest. Cash values and death benefits may also be affected.)
Like a life insurance applicant’s insurability, the availability of the waiver of premium rider may also be based on certain risk factors, such as general health and past medical history. In addition, once issued, most policies contain important eligibility requirements before the waiver of premium rider will take effect. Policies generally contain a specific waiting period (e.g., six months) before premiums begin to be paid under the rider. Some policies apply waiver of premium coverage differently for a disability occurring prior to age 60, compared to one occurring between the ages of 60 and 65. Under many policies, the waiver of premium provision terminates at age 65.
While the waiver of premium rider on term and whole life policies will generally waive the entire premium, the waiver may work a little differently in other types of policies, separating the premium waiver for the cost of insurance from that associated with the cash value or investment fund.
The definition of “disability” in your policy is also crucial, because it determines when your obligation to pay premiums ends. The key is usually whether you are “totally disabled” under your policy’s definition. While some policies consider you totally disabled when an illness or injury leaves you unfit for the type of work that you have always done, other policies may contain a clause that says you must be unfit for any type of work.
Riders to the Rescue
Policy riders tend to take a “back seat” when planning insurance needs because the main focus is to obtain coverage for adequate protection. Determining adequate protection, however, should also involve customizing your life insurance policy with riders that can provide additional benefits to help meet your needs.
If you have gotten this far, you must really be researching life insurance. I hope this has helped in your quest. Signing off now to go read up on some other boring, technical topic.
R. Kenner French, of VastSolutionsGroup.com, is an author of two books, speaks all over the country, and lives on an island — Bainbridge Island, WA.